Wrongful Trading and the Insolvency Act 1986

The burden of proof is definitely on Directors to show what steps they have taken to minimise potential loss to company creditors.
 It is a statutory offence under s214 of the Insolvency Act 1986 (IA 1986) for directors who conclude or ought to have concluded that there were no reasonable prospects of their company avoiding insolvent liquidation not to take steps which a reasonably diligent person would take to minimise the potential loss to the company’s creditors. If that means ceasing trading and realising the assets of the company with a view to paying off its creditors, then so be it.

There are many wrongful trading actions brought by liquidators against directors and former directors of companies under s214 IA 1986 and contributions are sought from directors who are deemed to have failed in their duty to take reasonably diligent steps to minimise loss to their company’s creditors. However, the existence of s214 (3) of the IA 1986 – which provides a statutory defence to a wrongful trading action – means a defence is likely to succeed in circumstances where the Court is satisfied in relation to the charged director that: “he took every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken”. But with whom does the burden of proof lie in establishing the defence?

A recent case study

In the recent case of Philip Anthony Brooks and Julie Elizabeth Willetts (Joint Liquidators of Robin Hood Centre PLC) –v- Keiron Armstrong and Ian Walker [2015] EWHC 2289(CH), the High Court considered an application by joint liquidators for orders against the directors of a company under s214 IA 1986 and was required to consider where the burden of proof lies in establishing the statutory defence.

In that case, joint liquidators applied for orders against the director’s of the company to force them to make contributions to the assets of the insolvent company in conjunction with an action for wrongful trading and an order for compensation under s 212 IA 1986 for breach of duty.

On the question of whether the directors knew or ought to have concluded that there were no reasonable prospects that the company would avoid going into insolvent liquidation, the High Court clarified that in establishing a defence under s214 (3) IA 1986 the onus falls on the director and not on the liquidator to prove that in conducting himself as the director of the company the director had taken every step to minimise the potential loss to the company’s creditors; it was not for the liquidator to prove to the contrary.

The case gives useful guidance in relation to how the courts approach the elements of a wrongful trading claim; it is also particularly helpful in clarifying where the burden of proof lies in establishing the statutory defence.

Find Out More

If you find yourself in a similar situation please contact our Dispute Resolution Department at Pinney Talfourd who will be happy to discuss your options.
Contact us on 01708 229 444 or click here to visit our Dispute Resolution page.

This article is only intended to provide a general summary and does not constitute legal advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at November 2015.